Document Type : Research Paper
Authors
1
Ph.D. Candidate in Finance, Science & Research Branch, Islamic Azad University, Tehran, Iran.
2
Assistant Prof., Faculty of Management and Economics, Science and Research Branch, Islamic Azad University
3
Assistant Prof., Faculty of Management, University of Tehran, Tehran,
4
Assistant Prof., Department of Financial Management, E-campus Branch, Islamic Azad University, Tehran, Iran
10.22059/frj.2025.381724.1007639
Abstract
Banks play a critical role in supporting economies and financial markets through the allocation of resources. They act as financial intermediaries by bridging gaps between savers and borrowers and simultaneously serve as liquidity providers by managing the maturity structure of their balance sheet items. This dual functionality positions banks as pivotal institutions for ensuring the smooth functioning of economic systems. Financing the economy is among the primary socio-economic objectives of the banking sector. Achieving this goal requires banks to access a diverse range of financial resources, enabling them to support economic activities, manage credit, and service their obligations, thereby maintaining stability within the broader banking system.
Bank financing involves generating financial resources to sustain banking operations and economic activities. According to the Asian Development Bank, financing encompasses various sources such as deposits, loans, payment services, and shareholder contributions. These resources empower banks to convert debts into liquid assets, effectively creating liquidity that is indispensable for economic operations. This capability underscores the importance of liquidity creation in ensuring resilience within financial systems. Additionally, the market power of banks, defined as their ability to attract customers and maintain competitive advantages, is closely linked to their financing structures. Banks leverage managerial and marketing strategies to secure market shares and expand their client bases, emphasizing the interconnectedness of financing and market dynamics.
Through liquidity creation and risk transformation, banks play an irreplaceable role in stabilizing economies and fostering growth. However, previous research has predominantly focused on risk assessment, often overlooking the interaction between financing, market power, and liquidity creation. To address this gap, the present study explores the relationships among these factors, aiming to provide insights into their influence on banking operations and financial stability.
To measure market power, the study utilized the Herfindahl-Hirschman Index (HHI), a well-established indicator of market concentration and competition. Bank financing was also analyzed using a modified HHI designed to capture the diversity of funding components, such as interbank borrowings, customer deposits, and issued securities. Liquidity creation was quantified using the index developed by Berger and Bouwman (2009), which categorizes balance sheet items based on their liquidity profiles. Data for this research were obtained from the financial statements of 10 publicly listed banks in Iran, covering the period from 2015 to 2022. Multivariate regression models employing pooled data techniques were applied to test the hypotheses.
The findings reveal that diversified and efficient bank financing significantly enhances market power. Banks with diverse funding structures exhibit greater resilience and competitiveness, underlining the importance of effective financial management in optimizing market position. Furthermore, the study demonstrates that liquidity creation amplifies the positive relationship between bank financing and market power. As banks generate more liquidity, they strengthen their ability to attract deposits and improve their operational efficiency, creating a feedback loop that reinforces market dominance.
This research underscores the need for policymakers to consider the interplay between financing structures, liquidity creation, and market power in their strategies. By fostering a deeper understanding of these dynamics, the study contributes to the development of policies aimed at enhancing banking efficiency and ensuring financial stability.
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